Gilead Sciences, Inc. (GILD) has had a strong month leading up to earnings, up 6% over the past few weeks. Yet despite appearing very cheap, Gilead has not done much of anything over the last 16 months or so. Even after a decent first quarter, GILD stock remains stuck and has become dead money.
The reason could not be more obvious, and until Gilead addresses this issue, it will remain dead money regardless of how cheap GILD stock appears.
GILD Stock Looks Cheap, But …
The Gilead story is not that hard to figure out. It bought Pharmasset to obtain a blockbuster HCV franchise, and from 2013 to 2015, GILD’s total revenue nearly tripled. Furthermore, Gilead’s operating margin jumped from 40% in 2013 to a peak of nearly 68% last year.
Needless to say, it has been smooth sailing for Gilead, and while GILD stock is up 400% over the past five years, it has been dead money for 16 months.
That said, the past 16 months have been very good for Gilead as a company. Not only did it report a record best with operating margins last year, but product sales were far better than analysts expected when 2015 began. GILD finished last year with sales of $32.2 billion, a vast improvement from its February 2015 guidance.
|Product sales guidance for FY2015|
|Initial guidance Feb. 3, 2015||$26-$27 billion|
|Update on April 30, 2015||$28-$29 billion|
|Updated on July 28, 2015||$29-$30 billion|
|Update on Oct. 27, 2015||$30-$31 billion|
Therefore, when GILD provided full-year product sales guidance of $30 to $31 billion for 2016 back in February, investors realized there was a good chance the actual number would be far higher.
Given this collective information, it might be hard to figure out why GILD stock has underperformed, or why it trades at just 8x next year’s earnings.
Gilead Sciences Is Built Around M&A
Prior to Thursday’s assault on equity markets, GILD stock had traded slightly higher in 2016. However, its earnings report unveiled the reason: $8 billion spent on share repurchases!
That is an enormous amount of money, about 6% of its shares outstanding — and even then, GILD stock struggled to trade higher.
With such big buybacks, Gilead had all the help it needed to surge during the last few months, but it never did. Clearly, this illustrates the degree of selling pressure and pessimism that surrounds GILD … but in saying that, many struggle to identify why Gilead shares are so cheap and struggle to trade higher.
The answer lies in how Gilead operates.
Aside from a successful HIV franchise that Gilead started developing back in the late 1990s, it has mostly grown and expanded through acquisitions. Obviously, there was the $10.4 billion acquisition of Pharmasset that forever changed GILD, but before that Gilead bought Triangle Pharmaceuticals for $464 million, which aided in the development of both Atripla and Truvada. Then, it paid $2.5 billion for Myogen, which became the backbone for its cardiovascular franchise.
Since these acquisitions, Gilead has been mostly quiet. Sure, it has made a few sub-$500 million purchases, but nothing major that will move the needle for its revenue or profits. In other words, Gilead is a company that finds value through M&A, and it has not been active in finding the next Pharmasset, something it needs to do in order to drive its $130 billion valuation higher.
Now more than ever, it is important that Gilead puts its huge cash pile of $21.3 billion to work.
Earlier this year, Gilead had to stop six trials evaluating Zydeleg in the treatment of various cancers, and shortly after, cancer chief Philippe Bishop resigned.
Importantly, Gilead’s cancer program was seen by many as GILD’s next big thing. That’s obviously not going to work out.
GILD Stock Is Going Nowhere
At the end of the day, GILD stock is cheap, the company has mountains of cash, and it boasts a storied history of successfully commercializing new products.
The problem is that Gilead’s HCV franchise sales will eventually falter as the patient population is cured of the disease. While Gilead will still create many billions of dollars in profit before that happens, investors are clearly looking ahead to the day when this happens.
Thus, Gilead needs to acquire something big, whether it makes a move into a new and large industry with the likes of Acadia Pharmaceuticals Inc. (ACAD), or it swings for the fences with an acquisition even bigger than Pharmasset with a company like Alexion Pharmaceuticals, Inc. (ALXN) or even Regeneron Pharmaceticals Inc (REGN), the bottom line is that GILD needs to do something.
Until that happens, don’t expect much from GILD stock, regardless of how cheap it looks, or how well it currently performs.
As of this writing, Brian Nichols was long ACAD.